Jokowi’s Challenge – Part 2: High hopes and harsh realities

The rags to riches tale of Indonesia’s Joko ‘Jokowi’ Widodo captivated millions of voters and aroused widespread optimism during this year’s election, but the incoming president is set to face some tough economic challenges when he takes over from Susilo Bambang Yudhoyono on October 20.

Since early 2011, Indonesia’s economy has undergone a period of significant deceleration. Economic growth has slowed to just 5.1% — its lowest level in almost five years — and Indonesia’s fiscal deficit has more than tripled, from 0.7% to 2.3% of GDP. Driven by political compulsion and continuing oil price rises, the outgoing government of SBY has spent billions of dollars on costly fuel subsidies, thus bringing the country’s fiscal deficit dangerously close to its legal limit of 3% of GDP. Jokowi will be under heavy pressure to reverse these trends as quickly as possible once in power, but his administration will have to start penniless thanks to the mess leftover by SBY.

Along the campaign trail, Jokowi showed remarkable optimism in his economic projections, promising voters that he can deliver 7% growth within a single, five-year term in office. Speaking at a televised presidential debate earlier this June, Jokowi said that “a [growth] target of seven percent is not difficult [to achieve],” but shortcomings in infrastructure, manufacturing and “strong human capital” must first be addressed if Indonesia is to realise its full economic potential. Jokowi wants high levels of investment and sustainable, export-driven policies to be the mainstay of his economic agenda, but he will have to focus on reducing SBY’s fiscal deficit before any such spending spree can take place.

Key to this will be a cutback in Indonesia’s astronomical fuel subsidies bill, which currently eats up around 20% of the national budget. By the end of 2014, the fuel subsidies bill is expected to hit $21bn, having fluctuated from $25bn in 2013 and $18bn in 2012. This money could be better spent on desperately needed infrastructure projects or investments in healthcare and education, which would in turn stimulate the wider economy and improve the lot of Indonesia’s poor. The long-term benefits of a reduced subsidies burden are patently obvious to most economists, but a lack of courage among Indonesia’s political leaders has resulted in only temporary, face-saving solutions, which fail to address the root cause of the problem. Fears of a popular backlash among enraged middle-class drivers has allowed the huge subsidy bill to become a staple feature of national policy, albeit at an immeasurable cost to Indonesia’s economy.

Previous attempts to raise fuel prices have been met by ad hoc mobilisations of infuriated motorists, provoking street battles between police and protestors, and in some cases even rioting. In May 1998, for example, amid the chaos of the Asian Financial Crisis, President Suharto agreed to enforce a 70% hike in fuel prices in return for an IMF bailout package. This decision precipitated the notorious riots of Black May in Jakarta, which ultimately led to Suharto’s ousting as well as widespread looting, ethnic violence and extrajudicial killings.

In the eyes of previous leaders since the downfall of Suharto, state-subsidised fuel has been the ultimate white elephant: its cost unbearable, its productive value non-existent, and yet to dispense with the subsidy altogether could be an act of political suicide. Jokowi is aware that fuel price hikes can often come with explosive repercussions, but he is confident that he can put an end to the subsidy without provoking havoc among the electorate.

During his election campaign Jokowi pledged to eliminate fuel subsidies “gradually,” over a period of four years, so that investment can be moved to “more productive activities that help poor families, such as irrigation for farmers, fertiliser subsidies and improving public transport.” Jokowi is yet to reveal the specifics of the scheme or a timetable for the incremental changes, but vice-president elect Jusuf Kalla has hinted that the new administration will aim to make the first cuts within 100 days of taking office. Jokowi and Kalla will have to secure cross-party support for this to happen, however, which could be difficult given that Jokowi’s coalition led by the PDI-P only controls 37% of seats in the legislature. This suggests that ironing out the finer details of the fuel subsidy changes might be an arduous process, despite a growing consensus among Indonesia’s politicians on the need for less subsidies and more investment.

There can be no doubt that Jokowi wants to create an economy that can truly uplift Indonesia’s poorest citizens and ensure sustainable growth for generations to come, but this will be a tall task for a man thrust into Indonesia’s top job with such little experience at the national level, not to mention the empty wallet which awaits him on October 20. Jokowi’s pledge to eventually discontinue state-subsidised fuel is a paradigm shift which has been long overdue, and one hopes that he will be able to formulate a more sensible national spending program without making poor voters feel the pinch. If Jokowi can rise to the challenges ahead, and get the rest of his administration on-board, then we should expect to see a more investment-driven economy and a narrowing of the gap between rich and poor, rather than another five years of high-cost, low-price gasoline, producing nothing but a fiscal mess.